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A Public Service Message from the American Income Life Insurance Co.Waco, TexasBernard Rapoport, Chairman of the Board and Chief Executive Officer LABOR AT THE CROSSROADS-IV BY GUS TYLER Consider what happens to the simple Keynesian device to stimulate the economy through government expenditures when applied in the current global setting. In the 1930s, government expenditures for New Deal reconstruction projects went to American residents who, in turn, spent the money to buy things and services from American residents who, in turn, did the same thing. The impact of each dollar spent by Uncle Sam was multiplied as the dollar moved through the system. In 1984, the federal government ran a deficit of some $200 billion a spur that should have driven the economy forward at a breakneck pace. What happened? In the first quarter, the stimulant worked as the economy leaped forward at the brisk pace of 10.4 percent. But, in the second quarter, the pace slowed to 8.5; in the third quarter to 1.6. The fourth quarter showed some quickening to 4 percent growth and was hailed as a forerunner of steady and solid growth in 1985. But in the first quarter of the new year, the pace came to a near standstill at 1.3 percent growth. The year ended with growth of only 2.3 percent. What happened was that government stimulants were being poured into a leaky bucket. The federal government poured money out to its residents who, in turn, bought items made overseas. The trade deficit was, as an order of magnitude, just about equal to the federal deficit. The Keynesian cure that was effective for nations at a time when, as in the case of the U.S., overseas trade was a minuscule portion of Gross National Product was no longer able to work its magic with nations where trade was one-quarter of their total business. By classical theory, of course, the U.S. should automatically benefit from a reversal of the process, turning deficits into surpluses, because of certain laws of equilibrium held in balance by an invisible hand. Since Americans would be demanding goods made overseas, our demand would boost the value of overseas currencies. Since foreign markets would not be buying our wares, the value of our currency would fall. At some point, we could not buy from them because their goods would be too expensive. They would start buying from us because our goods would be cheap to them, and all would right itself as Dr. Pangloss might have told them from the beginning. But in the real world of the early 1980s not the Adam Smithian world of the 1780s things did not behave necessarily as they should. America ran the greatest deficits any nation has ever run and its currency continued to climb until 1986. Why? It was because the American dollar was in demand. Why? First, because during the 1970s and the first half of the 1980s the rate of interest was high. Second, because the U.S. was a political safehaven as contrasted with the rest of the world. Investors holding marks, francs, pounds, or lire wanted to own dollars; their demand for the buck boosted the price. What drove the value of the dollar was not trade but capital flows. All this would have been inconceivable in the time of Smith and Ricardo, when it was assumed that capital would rarely cross material boundaries. “Every individual endeavors to employ his capital as near home as he can,” noted Smith. Ricardo insisted that it would be most imprudent for a merchant to allow his capital to operate out of his sight for any length of time. Yet today, the movement of capital across national boundaries is many, many times greater than the movement of goods. In the twentieth century, the phrase “comparative advantage” has lost just about all its meaning, if viewed in terms of the “natural attributes” of a nation. The factors of production are portable: capital, technology, raw materials, and managerial know-how. They can be moved easily and swiftly. Multinational corporations scour the planet to find out ‘ where best to allocate their resources to produce most cheaply, to pay the least taxes, to maximize after-tax returns. They do this even when they may not, as patriotic persons, want to do it, for the alternative is to be destroyed by a competitor who has no such qualms. This internationalization of the economy gives capital an almost unbeatable advantage over labor: the former is mobile, the latter is not. A global corporation can say to its employees: here are our terms; take them or else. The company can always relocate, labor cannot. Indeed, capital whether in the form of an industrial 20 AUGUST 14, 1987 7iFt